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— – -r. Walston &- Co. MEMBERS NEW YORI( STOCK EXCHANGE AND OTHER LEADING STOCK AND COMMODITY EXCHANGES NEW YORK PHILADELPHIA LOS ANGELES SAN FRANCISCO LUGANO (Sw.tmldl OFFICES COAST TO COAST CONNECTEG BY DIRECT PRIVATE WIRE SYSTEM TABELL'S MARKET LEnER November 19, 1954 FAN AMERICfN WORLD AIRWAYS Statistics The air transport stocks have shown exceptionally good techni- Current Market 17 cal action in recent months. From CUrrent Dividend SOl the lowest relative strength ra- Current Yield 4.7 ting of forty-six groups charted in May, the airlines have advanced Debt Frefer-red S-tock 43,125,000 to a position in the five highest –ra-ted – groups Mos t—4-nd-ividua-l–J.-r Common Stock (Shs.) 6,096,722 line issues indicate higher levels over both the intermediate and Net Fer Share,1952-A 1.09 lenger term, but the most favorabl Net Per Share,1953-il 1. 76 technical pattern in the group, in my opinion, is Pan American World Gross Revenues,1952 – 205 million Airways. From a technical viewpoin Gross Revenues,1953 21S million the pattern indicates an interme- diate term objective of 19-23 and Market Range, 1945-1954 29 -S a long term objective of 27-35.In an unfavorable general markt,ran ,'c – Inc ludes 661 in capital gains. j',merican would meet support in the 13-12 area. Thus, the upside potenr tial over the longer term appears to be lS points higher or over 100 as compared to temporarily five points lower or 30. This is a favorable technical ratiO. Pan American was incorporated in 1927. The company has grown from a minute route stretching from Key Hest to Cuba to the world's largest air- line with un international system reaching seventy countries and colonies on all six continents of the globe. The compaBy carries the American flag -to- most- pa-rts – of -theworld-f an i,meri-c-an opera-tes -about,-eG, GeO'-route- miles with an air fleet including 2S Stratocruisers, 45 C-6-Bs, 3 C-6-As, S L-49 Constellations, 10 Convair 240s, 26 Dc-4s and 7 DC-3s. On order are 7 DC-7-Bs for delivery in 1955 and 3 British jet planes (Comet III) and 15 DC-7-Cs for delivery in 1956. The operations of the company are divided into three divisions. The Atlantic Division originates from New York, Boston,Philadelphia, Chicago and Detroit and covers routes to Great Britain, Europe,Near East, Far East and Africa. The Latin-American Division starts from New York, Miami, New Orleans, Houston and Brownsville and reaches out to the Caribbean and Central American areas and to the entire east coast of South merica. The Pacific-Alaskan Division originates from San FranciSCO, Los hngeles, ort- land and Seattle and covers Pacific Islands, Far East, ustralia and Alaska. 50-owned Pan American Grace f,irways (Panagra), operates from the United States through MeXico and Central America to the west coast of South hmerica. Pan American's wholly-owned subsidiary, Intercontinental Hotels Corporation, owns nine hotels in South i'.merica, Mexico and Bermuda. Three were opened in 1953. Economic conditions have improved sharply in most foreign countries and this, together with probable convertibility of currencies, should help Pan American in the near future. The company has an interest in several small airlines and has a con- t-ra-ct to operate 'and maintain the -flir Force guided missile testing project at Cocoa, Florida. The company's operating revenues have growr. from 20 million in 1939 to almost 21S millionin 1953 or an increase of over 100C. Net income has not shown a proportionate increase, but has advanced from about 2 million in 1939 to almost 11 million in 1953. The two main reasons for the relatively poor earnings record up to 1952 have been higher postwar expansion costs and delay in establishing permanent mail rates. Ihile the majority of airlines have received permanent mail rates,Fan American is still operating under temporary rates for the Atlantic Division from 1946 to date, for American Overseas .irlines (purchased by Fan I,merican in 1950) from 1946 to 1950 and for the Latin I'merican Division for the year 1952. In 1952 and 1953, the Civil Aeronautics Board awarded the Latin-American .. …….,,a'li…..iiaiia-., – – –.. – '—– – Dlvision almost 8 million in back mail pay covering 1948 to 1953. In 1953 a permanent rate was established for this diviSion which was 5 million greater than that previously received. Fermanent mail rates for the Atlantic Division are currently being negotiated and involve a considerable claim for back payments since 1946. It is expected that the low temporary mail service payments will be substantially increased on a permanent baSis. It would seem that payment for the carriage of United States mail internationally should be made at rates fixed by the postal administrations of the world as members of the Universal Postal Union, a body to which the United States has adhered, by treaty, Since the last century. hs a member of this world wide body, the United States overnment compensates foreign-flag airlines for the transportation of United States mail at Universal Postal Union rates, which are higher than the rates paid United states-flag carriers for Similar transporta- tion. There appears to be no justification for this discrimination against United States-flag carriers rendering equivalent service. – TempoFarymai-l…-rates generallyprovide,for Gpel'ating-exp.ensesl3u-t-, do not take into consideration return en invested capital. Tbs another reason for anticipating a higher permanent rate than the present tempo- rary rate on the btlantic Division. This diVision is the most important division of the company and may be increasingly more so in the future. Establishment of permanent mail rates will go a long way toward eliminating the prejudice that Pan American is a speculative situation because of its dependence on direct subsidi'e s for overseas service. With the establishment of higher permanent mail service rates,this 'sab8Ldy would be lowered by a corresponding amount. 1,11 domestic air- lines formerly had large government subsidies,but only a few smaller lines now receive subsidies. On most domestic airlines, the mail pay- ments have been reduced to a point where thy only compensate for the actual service charge for carrying mail. Because Fan Icmerican operates in a world-wide field, it has had special problems which it has taken longer to solve, but the prospect of higher permanent mail rates and lower operating expenses should result in a higher earnings pattern over the near future. This has been evident in 1954 results. Earnings are published on an annual basis only so there is no interim comparison with the 1.76 earned in 1953 of which 661 was in capital gains.Operating reve- .– nues-f'Gr; the- nLnemontBs -enEleEl September 30)954 -increased,l2e m-i-llion or 8 over the 1953 nine months, and operating expenses were up less than 10 million, or 6.8. This resulted in a 10.8 gain in net income, after taxes, for the nine months. It is difficult to estimate just what 1954 earnings will be because of the uncertainty regarding the amount of capital gains to be shown. However, 1954 earnings should be above 1953. As the company in the past has paid out around 50 of earnings in diVi- dends, it is possible that a year-end extra may be declared. The com- pany has declared 801 in dividends so far in 1954. Annual depreciation charges are expected to continue at 17-20 million (2.80 – 3.30 a share) annually for the next two or three years. Thus the cash flow earnings are around 5.00-5.75 a share,but company is refunding its debt over the next several years and a repayment of 11.6 million is due in 1954. These repayments will increase to 14.7 million in 1955 and 1956. These will be amply covered by depreciation charges. Pan i,merican has a book value of 17.06 as of December 31st,1953. At its current price it 'is selling at about book value. t, comparison with other airlines shows it is selling lower in relation to its book value than most other airlines. Price 195'3 Book Value – Pan J-.merican 17 '17 .06 hmerican Airlines 19 8.08 Capital 18 13.04 Eastern 36 24.07 Northwest 15 17.05 Trans-vlorld 25 15.62 United 35 27.53 Pan l.merican has progressive management as witness its recent in- auguration of a plan that sells trips and vacations on the installment plan. Its cargo operations have been showing excellent results. All in all, the stock appears to be in a position to discount the improving growth position of the company. EDMUND y,l. ThBELL IAlSTON & CO.